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Catching the Con Artist

Traders Magazine, March 2005

John A. Byrne

The case for change in the Pink Sheets and Bulletin Board is clear. In this era of more transparency, it is difficult to find a reason to keep the lights dimmed for one crucial component of trading. That's the total short positions in all customer and proprietary accounts. Now there is a campaign to have this information published. It would be accomplished if the NASD expands 3360 of the Rules of Fair Practice so that all publicly traded equity securities are covered. This is not the first attempt at reform. But there is a more compelling reason for reform than ever before. The markets are still recovering from a period of shocks and scandals, a difficult period that can be traced in part to a lack of proper public disclosure of material information. This included real and projected stock prices, earnings and phantom earnings as well as executive compensation. The non-Nasdaq OTC market is no different from the other markets in how it responds to information. If certain information is properly and fully disclosed, then investors are well served. A recent decision by NASD Regulation illustrates how a lack of transparency in short selling can lead to widespread investor fraud. The NASD found that, in 1995, John Fiero and a group of traders orchestrated a bear raid using massive naked short selling. The goal was to drive down the price of securities underwritten by Hanover Sterling and Company. The activities of Fiero and others were ultimately blamed for the shocking collapse of Hanover Sterling's clearing firm, Adler Coleman.

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